Is Bulgaria a Cause for Concern?

People queue in front of a branch of Bulgaria’s First Investment Bank in Sofia on June 27, 2014.

Agence France-Presse/Getty Images

The Bulgarian government has stepped in with an emergency lifeline for its banking sector after two of the country’s lenders suffered a bank run. Should investors be worried?

This is not a mainstream coverage area for most analysts. But among those who do look at the country, most are reasonably confident that this won’t precipitate a crisis for the country’s central bank and its currency, which is pegged to the euro.

Last Friday, some customers at First Investment Bank received text messages or emails urging them to withdraw their deposits, prompting queues outside the bank’s branches as people sought to withdraw money. The lender had to pay out “a significant amount to depositors” before closing its doors temporarily in the early afternoon, the commission said.

Days earlier, Bulgaria’s central bank halted operations at the Corporate Commercial Bank, also known as Corpbank, after a run drained the bank of cash to meet client demands. The lender blamed negative reports in local media.

So what are analysts saying?

The emergency credit line extended to Bulgaria’s banking system following a run on two banks–Corporate Commercial Bank and First Investment Bank–”decreases the probability that contagion spills over across the system,” according to Gillian Edgeworth and Kristofor Pavlov at UniCredit. Those two domestically-owned banks control 18.5% of the system, while foreign-owned banks represent another 68.7% percent of the system’s total assets, UniCredit says (see chart below for Raiffeisen’s slightly different estimate). Even so, the crisis in the banking sector does “reinforce the need for Bulgaria to push ahead with a much more thorough overhaul of public sector governance and administration,” Ms. Edgeworth and Mr. Pavlov add.

The predominance of foreign-owned banks should be cause for comfort, according to Gunter Deuber and Emil Kalchev, analysts at Raiffeisen. “For foreign-owned banks it can be assumed that there would be an implicit “lender-of-last resort” responsibility with their parent banks,” they say.

Meanwhile, Bulgaria’s currency peg to the euro should be able to withstand the crisis currently hitting the country’s banking sector, says Simon Quijano-Evans, head of emerging markets research at Commerzbank. At €13.8 billion ($18.8 billion), the country’s reserves of foreign currency are roughly equal to its M1 money supply. That leaves plenty to cover a rush to convert Bulgarian lev-denominated bank deposits into euros, given a run of that size would be “an extreme case,” Mr. Quijano-Evans says.

Still, the troubles for Bulgaria’s banks, which appeared “out of the blue”, are symptomatic of political uncertainty in Eastern Europe which is likely to persist while tensions between Russia and the West over Ukraine remain high, he adds.

So far the market reaction is one of relief. Bulgarian shares are bouncing back Monday, recovering most of their losses from last week. Bulgaria’s Sofix index is up more than 4%, having already pulled back some of its losses on Friday, and is now trading close to levels seen last Wednesday before the crisis began to seriously weigh on stock markets. First Investment Bank, one of the lenders that suffered a run, is more than 20% higher. Shares in Corporate Commercial Bank remain suspended.

Not everyone is so sanguine. Nomura analysts Peter Attard Montalto and Keerthi Angammana wrote on Friday that any widespread attempt to convert deposits into euros “would threaten the currency board with the euro, which has been the bedrock of keeping Bulgaria a sound credit”.

That makes Bulgaria’s success in selling €1.49 billion of euro bonds last week at a yield of a little more than 3% look “bizzare”, they say.

“For us, this was the ultimate triumph of global investors buying simply on yield level and not fundamentals.”